Skills shortages in a booming market: The big oil and gas challenge

The strains on labor
capacity in oil and gas construction markets worldwide are
becoming increasingly well known. These strains continue to
affect forecasted project costs, and several large capital
projects have already been delayed or canceled (see
Shells Louisiana gas-to-liquids plant as an example) as a
result of rising costs and questionable long-term profitability
projections. As demand continues to
increase in the face of the liquefied natural gas export gold
rush, construction firms are faced with unprecedented pressures
to retain and grow talent.

To keep up with this extremely dynamic and
competitiveif not unprecedentedbusiness environment, US energy
infrastructure construction firms need to develop a robust
talent pipeline to tackle the industrys many business
challenges in the coming years. In 2008, just 3.8% of the total
construction workforce was engaged in direct oil and gas construction. By 2012,
6.4%nearly double 2008s numberof that
workforce was engaged in direct oil and gas construction.
According to FMIs estimates, by 2017, nearly 10% of the
total US construction workforce will have moved over to this
burgeoning segment of the industry, Tables
1 and 2.

Fierce competition for talent in this sector is already driving
construction companies to think about their human capital needs
and the strategies required to optimize their access
toand retention ofqualified and experienced
workers.

The oil and gas construction market remains vibrant,
and many firms are seeking new ways to expand and grow their
market presence, said Scott Duncan, a vice president with
FMI Capital Advisors. As competition for limited
resources intensifies, labor and talent management are quickly
becoming a key differentiator in company performance and
overall company value. Companies seeking to build a presence in
this market need to ensure they have the systems and processes
in place to maximize productivity and retain top
talent.

Top business imperatives for energy infrastructure
construction firms

If companies do not figure out how to transfer knowledge
from soon-to-be-retiring employees to younger generations of
workers, decades of industry wisdom and expertise will be lost
forever over the next five to seven years.

Following is a summary of the top-five business fundamentals
pulled from 25 in-depth interviews with executives of energy
infrastructure construction firms and select FMI industry
experts.

Develop comprehensive in-house training programs and
build long-term knowledge pipelines. The recent
expansion of the US oil and gas
industry, coupled with the retirement of many experienced
supervisors, is causing overstretched construction firms to
rethink their training and succession plans. Successful
companies are developing comprehensive knowledge transfer
programs, shifting knowledge from senior (and
soon-to-be-retiring) employees to the next generation and
leveraging organizational expertise and best practices across
the business.

Fast-track leadership programs are also becoming critical as
experienced craft workers move into leadership and mentoring
roles, training less-experienced employees in a very short time
frame. As one industry executive explains, With the
limited amount of skilled labor available, we took many of our
companys highly skilled craftsmen and turned them into
supervisors to help manage less-experienced workers. These
skilled craftsmen went from being welders one month to foremen
the next month, which doesnt necessarily mean
theyre good-quality supervisors. Leadership and mentoring
skills are very different from technical expertise.

In the fast-paced oil and gas industry, a purposeful
approach to training and knowledge transfer will not only
significantly increase the readiness and skill sets of the
employees, but it will also attract new talent to the industry
with the compelling story of commitment to the individual
employee. For energy infrastructure construction firms to
succeed, they will have to effectively attract, develop and
retain human resources. Developing a long-term strategy to
address these human talent issues and following through with
diligence and consistency on the execution of that strategy
will become the key competitive differentiators among firms in
the oil and gas sector.

Engage your people. In an industry
that is constantly in flux and characterized by extreme working
conditions, company executives must keep their employees
engaged and devoted on a daily basis. Industry leaders who have
established a good reputation over the years with corporate
cultures focused around safety, education and employee
well-being find themselves at an advantage in the war for
talent. If were talking about retention, then two
things are very important: Employees have to like what they do
and also like the people they work with and for, noted
Rena Lo, human resources manager at AMEC Oil and Gas, Inc.

Motivation, reward management and performance appraisal
largely drive employee retention and satisfaction. Even when
offered higher salaries and/or compensation packages, for
example, the most engaged and trained employees are less likely
to jump ship.

It really must be more than just the dollars,
said Cory Jodoin, president of Jen-Col Construction. Every
single person in my company can find a job elsewhere that will
pay more than what they earn here at Jen-Col. So you need a
culture where people value more than dollars. Thats the
challenge: coming up with a plan for retention, training [and]
development, and making every job meaningful.

Another industry executive added, A key focus for us
is succession, and we try to keep our people engaged at all
times. You have to treat people right, and these days many
companies dont seem to invest enough in their
people.

In addition to the methods mentioned above, the oil and gas
sector is using techniques like e-learning to retain current
employees and recruit new ones. Also playing a key role in both
retention and recruitment are fundamentals like safety culture,
working conditions, supervision, co-workers/interpersonal
relationships, job security and organizational policies.

Integrate HR with other core business
functions. Look at your organizational structure
and reevaluate how all the different departments and business
units are performingboth together and separately. Over
the last few years, CEOs in the construction industry have started
to look for synergies among functional areas, finding ways to
leverage support functions, such as HR, IT and finance, to be
fit for a purpose and ensure that they are more
closely aligned with the overall enterprise strategy.

I see a lot of stand-alone systems work counter to
each other. It can be very inefficient. For example, if you
have a strong HR department, and you are hiring great people
but have no systems in placesuch as a strong career path
or effective incentive-based compensation programthen
youll end up being a prime target for your competitors to
recruit talent, said Jason Baumgarten, FMIs Western
consulting group manager.

In the oil and gas sector, specifically, this could not be
more accurate. Human capital has become a hurdle, and
overcoming that obstacle requires buy-in from technical,
operating and HR leaders. From the board down to the individual
operating company level, new attention is being paid to human
resource functions whose operational objectives must be linked
to the firms overall operating targets. Aligning
different business functions in more integrated ways will help
increase communication across the organization and push
employees to work collaboratively and more effectively toward
common strategic goals.

Understand your risk. According to
the US Bureau of Labor statistics, the domestic oil and gas
industry lost a record number of workers on the job in
2012the same year that industry fatalities increased to
138 from 112 (in 2011). This represents a 23% increase and the
largest number of oil and gas worker fatalities since the
current data series for the BLS Census of Fatal Occupational
Injuries (CFOI) began in 2003.

These numbers echo the rapid pace at which the oil and gas
industry has been expanding in recent months. As energy
infrastructure construction firms scramble for skilled workers
to keep up with demand, companies are more apt to hire
less-experienced workers who lack the necessary safety training
or technical skills. An executive of a large EPC firm stated,
Weve seen brokers recruit people who worked as
fishermen in the past and say they can weld and now
theyre applying for offshore welding jobs. Most of these
people dont have any experience working in safe environments, and its a huge
risk for a company like ours to hire them on our projects.

To circumvent this whole frenzy and scramble for last-minute
bodies, construction firms and end users/owners
must rethink their collaboration efforts. Progressive energy
infrastructure construction firms are already looking into
innovative partnering approaches where the company establishes
relationships with the respective entities years before the
project even starts, including working with local union halls
and talking to them about their labor peaks over time.

In the oil and gas industry, where owners demand rigorous
safety standards and thorough risk management practices,
construction companies cannot afford to make any mistakes. A
competent workforceparticularly skilled
supervisionwill become ever more crucial in managing risk
and productivity on oil and gas construction projects. Mark
Breslin, CEO of United Contractors, added, In five to
seven years, I believe contractors ability to grow will
hinge on their ability to procure competent field supervision.
The boomer retirement curve is going to be painful. It
wont be bonding, capital or the marketbut the
contractors ability to provide qualified foremen
superintendents who can build work in a risk-averse
environment.

Work smarter and increase project management
capacity. Oil and gas projects worldwide are
increasing in complexity and scope as more companies discover
new frontiers and invest in nontraditional exploration methods.
Environmental impact, employee
safety, and strict adherence to budgets and schedules top the
list of stakeholder concerns. Successful energy infrastructure
construction companies are investing heavily in building their
project management capacity by innovating in areas such as
prefabrication, technology, knowledge management,
and communication, among other things. In the coming years,
clients will focus on construction companies that can limit
rework orders; optimize labor, equipment and materials
scheduling; and use a modular approach to project management. These tactics
will help improve productivity and manage costs in a tight
labor markettwo key concerns for owners in this
sector.

Brian Johnson, executive vice president at Michels
Corporation, stated, Due to the current shortage of
skilled welders as a result of the increased volume of pipeline
work throughout the country, we are taking a harder look at
automated welding systems to offset the needs that our clients
are requiring of usalthough this only helps in the
large-diameter pipe sizes.

The US oil and gas industry is on the brink of its largest
human capital shortfall as it faces one of the most significant
expansion periods in its history.
Successful companies are thinking long term and building new
talent pipelines, developing targeted interventions, assessing
the business impact of skills shortages, and considering the
options available to build competency. While there is no silver
bullet to solve significant skills shortages (the ongoing
nursing shortage is a good example of this), tactical
combinations of programs and new paradigms will become the
standard as the US oil and gas industry labor shortages
exacerbate. Potential implications for the industry might
include higher wage-push inflation, potential decreases in
international competitiveness, and even the erosion of future
domestic oil production capacity.

It is time to tie HR objectives directly to business
objectives and to build continuous feedback loops that will
help improve management techniques and ultimately influence
strategy. Through these and other efforts, oil and gas
infrastructure construction firms will find themselves better
positioned to tackle the labor shortages and move beyond to
ongoing success. Without these proactive moves, the US oil and
gas construction industry will struggle to right itself during
a period of unprecedented labor
shortages. HP

SCOTT
DUNCAN is a vice president with FMI
Capital Advisors, Inc., FMI Corporations
registered Investment Banking subsidiary. He works with
construction industry firms on mergers and
acquisitions, valuations and ownership transfer
issues.

SABINE
HOOVER is a senior research consultant
with FMI Corporation, and has more than 10 years of
applied research experience. During the past 10 years,
she has specialized in market research and thought
leadership focused on the design and construction industry. She
has also conducted comprehensive research studies for a
wide range of industry stakeholders.

Have your say

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I'm jumping in on this discussion a little late, but being a Project Management Trainer and Coach for the past 2 decades, I can't help myself! Solid Project Management best practices are not a magic wand that will guarantee to bring every project in on time, on budget and on requirement; however, even a small amount of attention to some basic processes in any type of project will improve the bottom line. There is a direct ROI to money spent on PM training and the data is there to prove it. Fundamentals such as effective communication management; stakeholder management; change management and organizational effectiveness generally, can make a huge difference, not only in project success but in hiring and retaining younger talent.

JIMMY KUMANA, CEO Kumana & Assoc06.23.2014

The idea of a skilled labor shortage is nonsense. There are tesn of thousands of highly experienced engineers twiddling their thumbs (at least in the USA) forced out of the labor market by layoffs and cutbacks by operating firms as well as EPCs. The problem is that most Companies are not willing to pay a fair wage for experience, and the long-term unemployed are not willing to work in a situation where their experience is not respected and they have to report to some freshly graduated punk as the boss..

Eric Marshall06.19.2014

I agree with a lot of what you have said the big trouble is that the HR people do not know what is expected of Piping designers and the job specification is totally stupid to put it mildly. The companies are wanting one man/women to be efficient in the process as well as vessel/tank/pump and then know about structures and project management and all the CAD packages need I go on oh forgot that they have to be a BsC and no more than 25 years old; if it was 25 years of experience it might just be possible yet the person would be the head of engineering so why apply. All the companies are their own worst enemies as they have failed to properly train designers over many years as they are run by bean counters who have know idea of what the job needs to complete it successfully.I served an apprenticeship of 5 years and have 45 years of experience on top, so I have seen the senior management change over the years into computer can do it attitude and you do not need trained people to do the job. I know this for a fact as the amount of work I have had to correct over the years is unbelievable. I rest my case and still looking for work.

Antonio D'Alessio06.16.2014

Until tender will be only EPC turn key (not separate engineering& design contracts and then construction contracts), and the award criteria by Oil%Gas Companies will be evaluated 80% cost, 20% completion time, 0% quality, construction companies have no interest in hiring skilled engineers, and engineering companies will disappear, "eated" by construction companies, in order to eliminate "disturbs" on their job.Disasters will come later, when awarding manager have been promoted (thank to savings obtained in awarding) in higher positions.Also field supervision should be assigned separately to the engineering&design company, and not to the main contractor:there is conflict of interests.

Tyler Harvey06.10.2014

I disagree strongly. If oil and gas engineering paid as well, offered the perks of tech, and the benefits of NOT living in Houston, you'd see a lot more people trying to get a job. Not every young person involved in oil-and-gas wants to live in bright red state.

John Light06.10.2014

We continue to run into folks that still believe that there is a large pool of skilled, experienced talent, just waiting in the curtains, (or clouds) ready to return to work. They are not there.

DOUG POSEY, P.E.06.10.2014

Construction companies disregard the ability to recruit highly skilled construction workers through building trades union's networking capabilities. When I was a young worker in the 1960’s employed on a major project with Bechtel building the Monsanto plant at Chocolate Bayou outside Houston we had a majority of workers called "travelers" recruited from across the United States. These workers were highly skilled with extensive experience and performed exceptionally well. Training of skilled workers needs to continue but "travelers" are still available if union labor is utilized in today's market. Unions can alleviate the projected area shortages of construction workers with “travelers”. FMI can assist clients by including union labor availability of “travelers” in their manpower projections.

Chempro06.10.2014

The shortage of trained labor can only get worse, as today's engineering students are being taught less and less about "first principle" engineering, and more about "real time simulations".

Project Management is a shambles - with the introduction of the PMP certification, even inexperienced designers and maintenance engineers are after a 4 day course - suddenly a "Project Manager" - the certification institutes are cashing in on this lucrative market.Experience cannot be bought - only earned, and this is why so many pipelines are not installed technically correct - the PMP certification only concentrates on schedule and cost (and a few other essential PM activities), but there is no technical or engineering content - great if you are in IT or moving offices, but surely not for installing chemical refineries where the lack of technical knowledge WILL kill innocent people.

Food for thought!!!

cheluvakumar06.10.2014

You have perfectly analysed the situation and this should be a wake-up call for the oil & gas industry captains not only in the US but elsewhere too.

Ruslan Zakirov06.10.2014

Do you truly believe in what you are saying here? There is no issue with manpower in real life. People are struggling to find a new job even with years of experience and big number of projects behind their belts. On many projects I have seen that experienced and knowledgeable people are laid off and green-hands are hired instead. There is no logic and no real retention initiatives - only declarations.

Amarjit Bakshi06.10.2014

There is a shortage of talented and experienced and pool but it has been made much more due to the hiring Manager's inadequacy of not being able to hire people;-- Who are highlt talented and experienced and concern about their own job.--- Want to hire a friend and not atalented or experienced person saying one is overqualified--- Leave out the people who are age discriminated who can provide much needed and valued input and better employee then any engineer coming out of the school.--- Go for only Ivy league.--- I can add many more reason's why shortage is there and why hiring managers might be at the wrong place to find the talent and they are there due to contacts which is called networking. Networkings other name is nepotism.

Hiring managers have problem not all the argument that there is on shortage of pool